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  • 8/10/2019 agreement on safeguards







    Submitted to: Submitted by: MR.


    Asst Prof. (COLS) SECTION A (ROLL NO. 12)U.P.E.S

  • 8/10/2019 agreement on safeguards





    CHAPTER 1....4


    CHAPTER 28


    CHAPTER 3...12


    CHAPTER 4...14


    CHAPTER 5...17



    CHAPTER 622


    CHAPTER 6 ...27



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    This project is an outcome of intensive research and study, with the hard work put in by many

    people who helped me to complete this project.

    My project is the combined outcome of the manual research done in the library and data

    collected through internet, where I found out valuable material on this project.

    I would like to thank Mr. Sujith Surenderan, for his support and his guidance. Thanks to the

    college and library staff, for showing faith in me and providing me the opportunity to work on

    this topic. I am also very grateful to classmates for their timely support in filling up the loop

    holes and issues that I faced.

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    The Agreement on Safeguards (SG Agreement) sets forth the rules for application of safeguard

    measures pursuant to Article XIX of GATT 1994. Safeguard measures are defined

    as emergencyactions with respect to increased imports of particular products, where such

    imports have caused or threaten to cause serious injury to the importing Member's domestic

    industry. Such measures, which in broad terms take the form of suspension of concessions or

    obligations, can consist of quantitative import restrictions or of duty increases to higher than

    bound rates.

    Major guiding principles of the Agreement with respect to safeguard measures are that such

    measures must be temporary; that they may be imposed only when imports are found to cause or

    threaten serious injury to a competing domestic industry; that they be applied on a non-selective

    (i.e., most-favored-nation, or MFN, basis; that they be progressively liberalized while in effect;

    and that the Member imposing them must pay compensation to the Members whose trade is


    The SG Agreement was negotiated in large part because GATT Contracting Parties increasingly

    had been applying a variety of so-called grey area measures(bilateral voluntary export

    restraints, orderly marketing agreements, and similar measures) to limit imports of certain

    products. These measures were not imposed pursuant to Article XIX, and thus were not subject

    to multilateral discipline through the GATT, and the legality of such measures under the GATT

    was doubtful. The Agreement now clearly prohibits such measures, and has specific provisions

    for eliminating those that were in place at the time the WTO Agreement entered into force.

    In its own words, the SG Agreement, which explicitly applies equally to all Members, aims to:

    (1) clarify and reinforce GATT disciplines, particularly those of Article XIX; (2) re-establishmultilateral control over safeguards and eliminate measures that escape such control; and (3)

    encourage structural adjustment on the part of industries adversely affected by increased imports,

    thereby enhancing competition in international markets.

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    The Uruguay Round Agreement on Safeguards represents an effort to improve the GATT

    safeguards (SG) process and thereby encourage countries to choose this option over antidumping

    and gray-area measures such as bilaterally negotiated export restraints. This paper offers a first

    detailed analysis of the way safeguards initiated under the agreement have been implemented in

    practice. We examine the actual trade effects of 14 safeguard actions, covering 85 different 6-

    digit Harmonized System product categories, implemented by WTO signatories between 1995

    and 2000. Our main focus is the extent to which safeguard actions conform to the GATT/WTO

    mostfavored- nation (MFN) principle. We identify two types of discrimination that arise in the

    application of safeguards: explicit departures from MFN treatment through formal exclusion of

    some exporters, and implicit departures from MFN as reflected by systematic differences in

    impact across trading partners. Our results indicate that the impact of SG action on a given

    exporter depends on the specific form of the safeguard policy. A SG implemented as a quota

    tends to preserve historical market shares more than a SG implemented as a tariff. When a SG is

    implemented as a quota, countries that have recently increased market share face reductions in

    market share relative to other suppliers. More generally, SG actions tend to favor established

    suppliers, whether large or small, over new suppliers and those whose market share has recently

    increased. We also find evidence that formal exemptions for developing countries and partners in

    a preferential trading arrangement allow these countries to gain market share at the expense of

    other suppliers.


    The WTO Agreement,1 like all trade agreements, is meant to promote international trade and

    therefore is also expected to increase import flows by mutually advantageous concessions. It

    might therefore appear astonishing and somewhat contradictory that the same agreement allows

    WTO Members

    to back-pedal and place restrictions on imports in the form of safeguard measures if thoseimports increase. While an increase in imports is the natural effect of trade liberalization, it has

    generally been recognized in trade treaty practice that there are certain circumstances in which

    import liberalization may become difficult to sustain - to a point of straining the very functioning

    1In this volume, the term WTO Agreement is used to refer collectively to the Results of the Uruguay Round

    Multilateral Trade Negotiations.

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    of those agreements. This is why, prior tothe GATT 1947, bilateral trade agreements normally

    provided for a safety valve in the form of safeguard measures. This is meant to avoid those

    circumstances where the contracting parties, faced with the dilemma of either having their

    domestic market heavily disrupted or withdrawing from their agreements, choose the latter

    option, thus ultimately reducing the overall level of liberalization.

    This is why the GATT 1947 contained a special provision on Emergency Action, in Article

    XIX. However, recognizing the potential for trade restrictive application of such provision, the

    GATT 1947 prescribed in some detail the conditions under which safeguard measures may be

    imposed. Article XIX, which has remained unchanged in GATT 1994, sets out such conditions

    in summary form. Paragraph 1 provides:

    1 (a) If, as a result of unforeseen developments and of the effect of the obligations incurred by a

    contracting party under this Agreement, including tariff concessions, any product is being

    imported into the territory of that contracting party in such increased quantities and under such

    conditions as to cause or threaten serious injury to domestic producers in that territory of like or

    directly competitive products, the contracting party shall be free, in respect of such product, and

    to the extent and for such time as may be necessary to prevent or remedy such injury, to suspend

    the obligation in whole or in part or to withdraw or modify the concession.

    Grey area

    Furthermore, some 150 safeguard measures were officially notified to the Contracting Parties to

    the GATT 1947.8 Soon, however, it became clear that measures other than Article XIX

    safeguard measures were resorted to by certain contracting parties to address import surges

    considered to be particularly injurious. Those were often designated with the term grey area

    measures and included the so-called Voluntary Export Restraints (VERs), Voluntary Restraint

    Arrangements (VRAs) and Orderly Marketing Arrangements (OMAs). These measures, instead

    of being formally adopted by the importing country, were formally taken by the exporting

    country or negotiated by exporting companies with the importing country.

    The reason for shifting to this type of measures is generally found in the difficulty to face the

    request for compensation from the rest of the contracting parties, as allowed by Article XIX

    [infra, section 4.6], and moreover, in the perceived additional difficulty in imposing safeguard

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    measures targeting only the main exporting countries (the so-called selective application of

    safeguard measures).

    Attempts to enact supplementary safeguard rules during the Tokyo Round of multilateral trade

    negotiations (1979) to, inter alia, contain this phenomenon did not succeed and no Safeguards

    Code existed until the establishment of the WTO. The SA thus represents the first

    supplementary safeguard discipline since 1947.

    Current situation

    Given the issues arisen in the application of safeguards under the GATT 1947, an Agreement on

    Safeguards was negotiated during the Uruguay Round with the following objectives:2

    improve and strengthen GATT 1994

    clarify and reinforce GATT 1994, and specifically Article XIX (Emergency Action on

    Imports of Particular Products)

    re-establish multilateral control over safeguards and eliminate measures that escape

    such control.

    enhance rather than limit competition on international markets.

    2SA, Preamble.

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    Economists have a love-hate relationship with the idea of contingent policies in general and the

    use of safeguards in a trade agreement in particular. On the one hand, because the economic

    environment is constantly bombarded with sudden and unexpected changes in everything from

    technology, to individual preferences, to the weather, it makes sense to give the parties to a trade

    agreement some flexibility to change the terms of the agreement when something unexpected

    occurs. On the other hand, depending on the rules of the agreement, it is not clear that the

    benefits of flexibility outweigh their costs. If too much flexibility is allowed, the credibility of

    the agreement could be undermined, and the agreement might provide few or no benefits.

    A safeguard is a temporary import restraint that is used to protect a domestic import-competing

    industry from foreign competition.3 Under the GATT/WTO system, when countries negotiate

    reciprocal tariff concessions; they commit themselves to maximum "binding" tariffs. These

    commitments restrict, to a considerable extent, a domestic policymaker's authority to unilaterally

    raise its tariffs at some later date. The GATT of 1947 included two provisions under which

    countries could reintroduce protective trade policies. Countries remained free to temporarily

    raise a tariff above the maximum tariff binding or introduce a temporary quantitative restriction

    under the Article XIX "safeguard" provision. Countries wishing to permanently raise their

    bindings could do so under Article XXVIII. The GATT of 1994 provides for the use of

    safeguards under the Agreement on Safeguards (AS).

    Safeguards add flexibility to trade agreements. Theoretically, this flexibility can improve welfare

    by making the trade agreement more responsive to a constantly changing economic environment.

    Alternatively, it can reduce welfare by undermining the credibility of the agreement. Both

    arguments have been made in the economics literature. As an empirical question, the issue isunresolved.

    Perhaps the most widely cited argument in favor of safeguards is that they can facilitate greater

    tariff liberalizations by governments during trade negotiations. Because a government has an

    escape valve if a tariff reduction causes pain to its producers, it has more freedom to make larger

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    and potentially more risky tariff reductions. Because there are large gains from permanent tariff

    reductions and relatively small costs from imposing temporary safeguards in a few sectors, the

    world gains by having safeguards in a trade agreement, even if they are not used. Jackson (1997)

    provides an intuitive discussion of this. Ethier (2002) asks: how does the interaction between

    unilateralism and multilateralism affect the pace of trade liberalization? His central concern is to

    analyze a trading system like the GATT/WTO which is characterized by the general practice of

    negotiating tariff reductions to benefit all members and the occasional use of temporary

    unilateral tariff increases through safeguards or antidumping duties. He develops a multi-country

    model in which countries grow at different rates. He shows, first, the pace of trade liberalization

    is constrained by the slowest growing countries in the world. He then illustrates how allowing

    these countries to temporarily raise their tariffs can accelerate the pace of worldwide trade

    liberalization. The key insight is that when countries negotiate tariff reductions, they do not

    know if their growth will be fast or slow. In a trade agreement that does not allow temporary

    tariff increases, countries fear their growth will be slow and will negotiate only small tariff

    reductions. When safeguards are added to the trade agreement, countries negotiate large tariff

    reductions because they know that if they turn out to have slow growth, they can temporarily

    increase their tariffs. Klimenko, Ramey, and Watson (forthcoming) arrive at a similar result by

    examining the question of why the WTO's Dispute Settlement Body (DSB) exists. In their paper,

    they show that when countries regularly renegotiate their tariffs, as in the WTO's trade rounds, a

    DSB is necessary for the trade agreement to survive. A DSB makes it possible for countries to

    punish each other for violations. Because countries want to avoid punishment, they will not

    violate the trade agreement when it includes a DSB. As an extension to their paper, they also

    show that if the DSB allows countries to temporarily raise their tariffs (as is the case with

    safeguard measures) in response to some unexpected change in the economic environment, they

    will negotiate larger tariff reductions initially.

    In some ways this is an impossible task - how can we prove that countries negotiate lower tariffs

    when a safeguard is part of a trade agreement when all the trade agreements in existence include

    safeguards. In section 4 I present an empirical model of the relationship between safeguards and

    tariff reductions by WTO members that attempts to quantify this relationship by using cross-

    country variation in safeguards use and tariff reductions. My results are generally supportive of

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    the hypothesis that safeguards facilitate tariff reductions. An interesting study of India's trade

    policies by Bown and Tovar (2007), which exploits cross-product variation in the magnitude of

    tariff reductions, finds that safeguards and antidumping duties are applied more frequently to

    products that experienced large tariff cuts in the 1990s. Thus, their findings appear generally

    consistent with the idea that an "escape clause" in a trade agreement can facilitate greater tariff

    reductions ex ante.

    Another economic argument in favor of the inclusion of safeguards in a trade agreement is that

    they act as a form of insurance against adverse economic shocks. When an unexpected change in

    the economy occurs (e.g. a price falls, the volume of imports rises, etc.), imposing a safeguard

    can partially mitigate the effect of the change (by stemming the price fall, restricting imports,

    etc.) and, thus, acts as something similar to an insurance payout. Bagwell and Staiger (1990)

    explore how price fluctuations affect large players in a trade agreement - countries like the US,

    EU and Japan who have markets that are so large, their safeguard measures can significantly

    alter world prices. They argue that due to the self enforcing nature of the trade agreement, in

    periods of large import volumes, a safeguard measure acts as a pressure valve to enable countries

    to sustain cooperation by temporarily raising tariffs. In the absence of a safeguard clause,

    countries would not be able to sustain cooperation, and the result would be a costly trade war of

    high levels of tariff retaliation.

    Fisher and Prusa (2003) show that small countries, which can not affect world prices, can use

    safeguards to insure themselves against international price shocks. In their multi-sector model,

    imposing a safeguard in the face of a negative world price shock improves national welfare by

    improving the welfare of the import-competing sector.

    An alternative set of arguments for why safeguards are needed in a trade agreement is that they

    improve national welfare for politically powerful countries or that they improve the welfare of

    politically powerful agents in politically powerful countries. Without the participation of these

    powerful countries, the agreement might not be formed. These papers founded on strong

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    assumptions about redistribution3do not try to explain why safeguards are needed in a trade

    agreement. Instead, they offer explanations for why safeguards are included in trade agreements.

    Several theoretical papers (Matsuyama, 1990; Miyagiwa and Ohno, 1995, 1999; Crowley, 2006)

    explore how safeguards benefit import-competing firms that are technologically behind their

    foreign competitors. These papers examine the consequences of using a tempossrary safeguard to

    induce domestic firms to adopt newer, more efficient production technologies.

    3Note that redistribution in political economy models can be a redistribution from a weak or impoverished group

    to a strong or wealthy group.

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    CHAPTER- 3


    The Uruguay Round Agreement on Safeguards (AS) represents an effort to improve the

    safeguards process and thereby encourage countries to choose this option over antidumping and

    gray-area measures such as bilaterally negotiated export restraints. In contrast to antidumping,

    which is designed to protect domestic firms from injury due to unfair trade, safeguards provide

    Temporary relief to domestic industries that suffer serious injury due to fairly traded imports.

    In contrast to antidumping and gray-area measures, safeguards are intended to limit imports

    across the board rather than from particular exporters, and the AS explicitly reaffirms the

    principle of most-favored-nation (MFN) treatment in application of safeguards. However, the AS

    also authorizes explicit discrimination among exporters in specified circumstances. Moreover,

    implementation of safeguards (SG) according to the procedures laid out in the AS may entail

    implicit discrimination among exporters to the SG-protected market.

    The nondiscriminatory treatment of trading partners, known as most-favored-nation (MFN)

    treatment, was a fundamental principle of the original GATT system (Article I) and has been

    carried over into the World Trade Organization. Its continuing appeal reflects both political and

    economic-efficiency considerations. Yet exceptions to MFN treatment profoundly affect trade

    among members of the WTO. GATT Article XXIV permits the formation of preferential, i.e.,

    discriminatory, trading arrangements among groups of countries, and such arrangements now

    constitute an important feature of national trade policy. Special and differential treatment of

    developing countries, including the Generalized System of Preferences, became an element of

    the GATT system in 1971, as membership expanded beyond the original rich mans club of theearly postwar period to include many newly independent nations. The Tokyo Round negotiations

    enlarged the scope of this differential and more favorable treatment, and the Uruguay Round

    agreements likewise incorporated special terms for developing countries.

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    GATT/WTO-sanctioned relief from import competition is likewise subject to rules that entail

    discrimination among trading partners. With regard to injurious unfair trade, permitted remedies

    (antidumping duties or other arrangements, countervailing duties) are applied only to those

    import suppliers found to sell below fair value or to benefit from government subsidies.4

    Action on unfair trade is thus inherently selective, i.e., discriminatory. GATT rules on safeguards

    allow temporary protection of sectors experiencing serious injury due to fairly traded

    imports5.Because affected exporters are not alleged to have violated any norm, GATT/WTO

    safeguard rules impose a more stringent injury test than in the case of unfair trade (serious versus

    material injury) and also require compensation of exporting countries in some cases. Moreover,

    because there is less focus on the source of the imports, safeguard measures are generally

    assumed to apply equally to all import sources and thus to be consistent with the MFN principle

    of the GATT/WTO system.6

    4 Economists believe these remedies often target exporting nations that have recently increased

    competitiveness in

    the relevant industry, and especially countries lacking the capacity to retaliate in kind. Blonigen and Bown


    find evidence that threat of retaliation affects U.S. antidumping activity.5

    Originally designed as an escape clause to allow temporary re -protection of an import-competing industrythat suffers unforeseen damage due to trade liberalization, safeguard protection has become increasingly

    available to any industry that can demonstrate serious injury due to competing imports, even when the

    competing imports have not benefited from a recent improvement in market access. An escape clause in the

    modern sense was introduced in the U.S. Reciprocal Trade Agreements Act of 1934 (Jackson 1997, 179).

    Recent U.S. safeguards have been initiated under Section 201 of the Trade Act of 1974.

    6For example, Leidy (1995, 29), in a paper critical of the broad use of antidumping, cites the GATT safeguards

    provision (Article XIX) as a preferred means of defusing protectionist opposition to trade liberalization through

    temporary protection on a most-favored-nation basis in sectors experiencing serious injury.

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    International commitments to limit import protection in specific industries typically include the

    conditions under which countries may restore protection for the same industries. Under Article

    XIX of the GATT (Emergency Action on Imports of Particular Products), a country is allowed to

    take safeguard actions when imports seriously injure or threaten serious injury to the competing

    domestic sector. Article XIX also specifies that affected exporters may request compensation for

    loss of market access. Hoekman and Kostecki (2001) suggest two distinct motives for including

    an escape clause in the GATT/WTO system: as insurance and as a safety valve. The insurance

    motive reflects that without such provisions, governments may be reluctant to sign trade

    agreements leading to substantial liberalization. Including an escape A related paper is Prusa

    (2001), which investigates the trade-diversionary impact of discriminatory antidumping

    measures on non-named exporters of the product targeted by an antidumping measure. clause

    may thus facilitate liberalization of trade by encouraging negotiators to be bolder in their offers

    of concessions. The safety valve motive reflects that governments may later feel pressure to

    renege on certain negotiated liberalization commitments. By legalizing some backsliding under

    carefully specified circumstances, an escape clause can protect the integrity of the remainder of

    the agreement and therefore improve the overall durability of a liberal trade regime.

    However, few countries actually appealed to Article XIX in coping with fairly traded but

    injurious imports. During the GATT period, the United States and other countries opted instead

    to negotiate bilateral trade restrictions outside the framework of the GATT or, especially more

    recently, to apply GATT-sanctioned antidumping measures.7These preferred remedies could be

    applied selectively to a few trading partners, thus obviating any need for even the appearance of

    MFN treatment of exporters. Moreover, use of dumping action rather than safeguards eliminated

    7Thanks to elastic legal criteria for dumping, most injurious imports can be labeled successfully as unfair. An OECD

    review of antidumping cases in Australia, Canada, the European Union, and the United States concluded that in 90

    percent of cases where imports were found to be unfairly priced under antidumping rules, the goods would be

    considered fairly priced under domestic antitrust or competition policy (Finger 1998, 13).

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    any requirement of compensation for affected exporters8 and had the political appeal of

    attributing the domestic industrys problems to unfair foreign competition.

    The Uruguay Round Agreement on Safeguards added specificity to the ambiguous language of

    Article XIX in a number of key areas9

    . Some elements of the agreement are largely procedural,

    including clarification of the injury requirement and timing and duration of safeguard protection,

    and establishment of a monitoring body (the WTO Committee on Safeguards) to which members

    must report safeguard actions. An important substantive changein rules is that bilateral

    arrangements such as voluntary export restraints (VERs) and orderly marketing agreements

    (OMAs) are explicitly prohibited (Article 11.1b).

    Under the AS, countries may implement safeguard protection through tariffs, quotas, or tariff-

    rate quotas (TRQs). The empirical analysis below suggests that inclusion of quotas and TRQs

    along with tariffs as allowable instruments has important implications for the distribution of the

    economic impact of safeguard protection across affected exporters. A second important change

    in rules concerns compensation for exporters affected by safeguard actions. Specifically, a

    country facing an absolute import surge is no longer required to offer compensation for the first

    three years that a safeguard is in effect. Ceteris paribus, this change should make safeguards

    relatively more attractive in comparison with alternative means of obtaining relief from injurious

    imports, especially antidumping.10

    Our results indicate that the impact of SG action on a given exporter depends on the specific

    form of the safeguard policy. A SG implemented through a quota tends to preserve historical

    market shares more than a SG implemented as a tariff. When a SG is implemented as a tariff,

    countries that have recently increased market share gain at the expense of other suppliers, while

    a quota tends to have the opposite effect. Although we are not able to compare these results to

    the hypothetical case of a purely MFN SG, it seems safe to conclude that SG implementation

    8In contrast, use of VERs encouraged affected exporters to form cartels and also provided compensation in the

    form of quota rents.9Reform of safeguards was also a goal in the Tokyo Round. This effort failed because of disagreement on several

    issues, notably including discriminatory application of safeguard measures (Jackson 1997, 209). On the concerns

    that motivated the Uruguay Round negotiation on safeguards and details of the final agreement, see Bown and

    Crowley (forthcoming) and references cited there.10

    For a discussion of these and other economic incentives affected by Uruguay Round reforms to safeguards,

    antidumping, and dispute settlement under the WTO, see also Bown (2002).

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    through a tariff comes closer to achieving nondiscriminatory results. We also find evidence that

    formal exceptions for developing countries and PTA partners do allow these countries to gain

    market share on average, although the estimated effect is larger for PTA partners than for

    developing countries. Nonetheless, the departure from MFN treatment intended to shelter new

    developing-country suppliers from the full effect of SG action appears to have been effective at

    least in qualitative terms.

    While we have not addressed the issue explicitly here, Bown and McCulloch (2003) also

    document evidence that safeguards have a discriminatory impact on the exit response of new

    entrants, when compared to the exit response rate of earlier new entrants that were not faced

    with a safeguard and when compared to other small, but historically present, suppliers that were

    also faced with the imposition of a safeguard.

    Because the form of a SG policy is key to its impact across suppliers, a logical follow-up study

    would investigate the political-economy determinants of the SG-imposing countrysdecision to

    initiate a safeguard and its choice of SG policy. The markets in which the 14 SG actions were

    taken had experienced recent increases in the number of supplying countries, not just in the total

    value of competing imports. However, such an analysis requires a comparison set of otherwise

    similar markets in which no SG was subsequently imposed in order to determine whether the

    increased number of suppliers played a significant role in the decision to apply safeguards. Data

    from our cases also suggests that the timing of new supplier entry may play a role in the choice

    of SG instrument. When the new entry occurs in the year immediately prior to initiation of the

    SG, use of a non-tariff measure with market shares based on historical averages favors

    established suppliers over new entrants. However, if the new entry occurred two or three years

    before initiation of the SG, non-tariff measures would no longer be expected to differ

    significantly from tariffs in their relative impact on established versus new suppliers.

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    programs seem a much more tailored response, providing income and transition assistance to

    those who plausibly require it.

    Second, and related, it is not clear that safeguard measures will compensate for trade -related

    dislocation in any meaningful sense. Depending on how they are implemented, they may simply

    postpone the burden of dislocation rather than reduce itthe discussion below of safeguards and

    the adjustment cost problem will have more to say about this issue.

    Finally, it seems clear from the text of Article XIX that safeguards were not conceived as a

    general compensation mechanism. They were to be employed only when unforeseen

    developments led to import-related dislocation. In perhaps most cases, however, the dislocation

    associated with trade liberalization is quite expectable, and indeed it is the anticipated

    competitive advantage from trade concessions that leads exporters to encourage their political

    officials to secure better access to foreign markets. If distributional equity were the goal of

    safeguards, I can see no reason why measures to achieve it should be limited to the situations in

    which dislocation was unforeseen.

    B. Efficiency Rationales for Safeguards

    Restoring Competitiveness- Industries seeking protection in the form of safeguard measures

    rarely portray themselves as suffering an inevitable long-term decline. Rather11

    , they usually

    claim that they are viable industries besieged by foreign competition, and seek a respite to restore

    their competitiveness. They commonly suggest that additional capital investments are needed

    to that end, and that a period of higher prices supported by trade protection is needed to permit

    them to raise the internal capital necessary for such investments.

    Economists typically regard such arguments as highly suspect. If investments to restore

    competitiveness are really justified in the sense that they yield a positive net present value, why

    do the capital markets not finance them without any need for trade protection? Implicitly, theargument for protection to restore competitiveness rests on some capital market imperfection that

    interferes with the ability of firms to raise external capital, thereby necessitating an infusion of

    internal capital. It is not clear why such capital market imperfections should arise. Moreover,

    11See Jackson, Davey & Sykes, at 611. See also Deardorff (1987).

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    even if capital markets imperfections exist, the logical government response would not likely be

    protective tariffs or similar measures. A superior policy would be to subsidize borrowing by the

    firms in question, to the extent of removing any unjustified premium in the cost of capital to the

    industrythis policy would allow worthwhile investments to be financed through borrowing,

    without introducing the deadweight costs of protectionism. Finally, nothing in WTO law or

    national law on safeguard measures requires any demonstration of capital market imperfections

    as a predicate to them.

    Accordingly, notwithstanding the rationale offered for safeguard measures by many of the

    industries that seek them, it is difficult to imagine that the function of safeguards in the WTO

    system is to address capital market imperfections that stand in the way of valuable investments to

    restore competitiveness. In the main, industries that are declining due to import competition

    are inefficient, and an exit of resources from those industries is generally desirable. Any

    additional investments in such industries that are economically justified can and will be made

    without a period of trade protection.

    Adjustment Costs-An efficiency rationale for safeguard measures that has received somewhat

    greater credence from economic commentators is the possibility that they may afford a sensible

    way to address adjustment costs in declining industries. This thesis is put forward recently in

    Horn and Mavroidis (2003), and to some degree by Sykes (1990). Horn and Mavroidis focus on

    the costs of unemployed factors of production (most notably labor), and suggest that measures to

    slow the pace of industry contraction may, under certain conditions, reduce these costs. They

    begin by acknowledging that nothing is gained by a safeguards measure that simply postpones

    the costs of adjustment without reducing them, incurring the economic costs of protectionism in

    the process. But it is possible to imagine that protection can reduce adjustment costs and not

    merely postpone them. As an example, they posit a declining industry in which 12,000 workers

    will lose their jobs each month. They further imagine that suitable positions for those workers

    will open up in another industry, but only at the rate of 6,000 per month. By slowing the rate of

    layoffs in the declining industry to 6,000 per month in this scenario, safeguard measures can

    avoid the unemployment that results when 12,000 laid-off workers a month have only 6,000 new

    jobs open to them.

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    Horn and Mavroidis concede that such problems will only arise under limited conditions. In

    particular, why do workers in the declining industry suffer unemployment12

    if they have no

    alternative job opportunity, rather than taking whatever wage cuts are necessary for them to

    retain their positions? And if the supply of unemployed workers to other industries is greater

    than the demand at current wages, why do wages in other industries not fall to accommodate

    more hires? In a well-functioning labor market with wage flexibility, unemployment should

    reflect an efficient period of job search rather than an inefficient idling of resources. But there

    are reasons why wage adjustments may not clear the labor market efficiently. Horn and

    Mavroidis note the possibility that labor unions may resist wage cuts. Another possibility is that

    government safety net programs provide income subsidies that discourage workers from seeking

    new jobs as quickly as they might. One can perhaps imagine other reasons, and thus it is

    certainly possible in theory that industries may contract too quickly and that measures to slow

    the rate of contraction may be useful, other things being equal.

    It would not necessarily follow that safeguard measures are the best policy response, however, as

    Horn and Mavroidis also acknowledge. Various other policy instruments might be employed to

    address the problem, such as subsidies to encourage the hiring of the unemployed. But all

    instruments are imperfect, and it is perhaps conceivable that measures to protect a declining

    industry that slow its rate of contraction may at times be the best option.

    Does this possibility afford a convincing account of the safeguards provisions in WTO law? In

    my judgment, the answer is no. The reason, quite simply, is that nothing in the structure of the

    safeguards rules (or in the laws that implement them at the national level) limits safeguard

    measures to circumstances in which they might usefully slow the process of contraction. Sykes

    (1990) makes the point that U.S. law permits safeguards in a far broader set of circumstances,

    and it is clear that WTO law does as well. Neither body of law requires any showing that an

    industry is exhibiting inefficiently high levels of unemployment of labor or any other factor of

    production, much less evidence that temporary protection can do more than merely postpone the


    12Haveman, Jon D., Usha Nair Reichert and Jerry G. Thursby (2003). How Effective are Trade Barriers? An

    Empirical Analysis of Trade Reduction, Diversion and Compression, TheReview of Economics and Statistics 85 (2):


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    A more convincing explanation for the role of safeguard measures in the WTO/GATT system, in

    my view, proceeds from a contractarian perspective blended with political economy. A formal

    model developing this analysis in greater detail may be found in Sykes (1991).

    The analysis begins with the proposition that the political officials who enter trade agreements,

    much like the parties to private contracts, seek to use the agreements to promote their mutual

    welfare. For most such officials, their welfare metric is a political one, and they will seek to

    design trade agreements that enhance their political fortunes by attracting voters, campaign

    contributions, or other manifestations of political support. Such political gains from trade

    agreements result in the main from market access commitments that benefit domestic exporters

    and lead them to reward the officials who obtain those commitments. To some extent as well,

    officials reap political benefits when imports become cheaper for politically efficacious

    consumers and consuming industries. These benefits must be balanced against the political costs

    of trade agreements, however,

    Which stem primarily from reduced barriers to imports and the attendant opposition to trade

    agreements from import-competing industries An ideal trade agreement from the standpoint of

    political officials will maximize the net political gains relative to political costs, allowing the

    officials to achieve their Pareto frontier.

    Just as the parties to private contracts face uncertainty about the future, so do the officials who

    become parties to trade agreements. It is accordingly necessary for them to contemplate trade

    concessions under conditions where the political costs and benefits to them are somewhat

    unpredictable. A first-best contingent contract would provide for the revocation or

    modification of any trade commitments that prove to be a net detriment after uncertaintyresolvesthat is, anytime the political costs of a concession to the party that makes it prove

    greater than the political benefits it confers on other parties13

    .It is difficult to specify in advance

    1326This rough characterization can be made more precise in a formal modelin any contract that achieves the

    Pareto frontier for political officials, a shadow price exists that allows the welfare of each official to be compared

    to that of the others. A first-best trade agreement would provide for the revocation of any trade concession

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    all of the circumstances in which this problem may arise, however, and so the parties to trade

    agreements must develop other strategies for facilitating the modification of the bargain as new

    information comes to light. One option, of course, is simply to renegotiate, and the WTO/GATT

    system has always contained legal provisions for renegotiation. Another strategy is to provide

    authority for the revocation of modification of concessions in specified classes of cases where

    concessions have become a net burden politically.

    Concessions can prove quite burdensome on officials in importing nations when an import-

    competing industry is in severe decline. It is a commonplace that declining industries invest

    more resources in the pursuit of protection and often secure it (witness steel and textiles in the

    United States). This phenomenon has a clear economic explanation. Declining industries have

    made sunk investments on which the rates of return are generally below competitive levels.

    Consequently, if they are able to obtain protection, much of the increase in the rate of return will

    be retained by existing firmsno new entry will occur until returns exceed the competitive level.

    In addition, declining industries tend to exhibit significant unemployment, with workers

    forfeiting their returns (quasi-rents) to industry-specific human capital investments. They will

    lobby aggressively for policies that restore those quasi-rents, and the prevalence of unemployed

    workers may also make the broader population more sympathetic to protective measures. These

    considerations suggest an explanation as to why Article XIX affords assistance to industries that

    exhibit serious injury.

    The fact that an industry is in serious decline, however, is insufficient to explain why a trade

    agreement would permit importing nations to afford new protection to it. The costs of such

    measures to other parties must also be taken into account, in particular the costs to adversely

    affected exporters and the political officials that represent them. The circumstances where

    restraints on exports do relatively less damage to exporters (and their political representatives)

    are, not surprisingly, much the opposite of those in which

    This rough characterization can be made more precise in a formal modelin any contract that

    achieves the Pareto frontier for political officials, a shadow price exists that allows the welfare

    of each official to be compared to that of the others. A first-best trade agreement would

    which, ex post, causes one official to lose more welfare than the others gain from it, converting the welfare of each

    official into a common metric using the proper shadow prices. See Sykes (1991).

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    provide for the revocation of any trade concession which, ex post, causes one official to lose

    more welfare than the others gain from it, converting the welfare of each official into a common

    metric using the proper shadow prices. See Sykes (199)

    Import-competing industries lobby most heavily for protectionthe harm will likely be the

    smallest when exporters are prosperous and expanding. Restrictions on exports can then be

    absorbed without reducing rates of return to exporters much, if at all, below competitive levels,

    and may simply discourage new entry that would have dissipated supra competitive returns

    anyway. Likewise, restrictions on exports can typically be absorbed under these circumstances

    without producing significant unemployment, and the attendant political pressures to address it

    noted above.

    These observations suggest an explanation for why Article XIX requires increased imports as a

    predicate to safeguard measures, since circumstances in which imports are increasing into the

    nation contemplating safeguards can serve as a rough marker for instances in which the exporters

    responsible for the increase are prospering. But that correspondence is surely imperfect. Imports

    may be rising for a number of reasons that do not necessarily reflect circumstances in which the

    exporters are prosperous. The additional requirements found in the original text of Article XIX

    to the effect that the increase in imports must represent the unforeseen consequences of a trade

    concessiontend to ensure a better fit with the cases in which safeguards will yield net political

    benefits. The unforeseen developments requirement makes clear that Article XIX was only

    meant to facilitate the withdrawal of concessions that prove unexpectedly harmful politically,

    consistent with the idea that safeguards exist to address the problem of contractual uncertainty.

    And the requirement of linkage between increased imports and a trade concession tends to ensure

    that the exporters who will be harmed by safeguards are prospering. For if their exports are

    growing with unexpected rapidity as a result of a trade concession, chances are they are doing


    To be sure, such conditions are not the only ones where net political benefits may arise from

    protection. The logic here suggests that net benefits may result any time that unexpected

    developments produce the combination of a severe decline in an import-competing industry,

    along with growth and prosperity for its foreign competitors. The next section will suggest how

    these conditions may arise from other events, and thereby suggest some possible guidance for the

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    proper use of safeguards when imports surges cannot be linked to the unexpected effects of a

    trade concession.

    This line of analysis also provides an explanation as to why Article XIX should be designed to

    provide temporary rather than permanent protection for declining industries. Declining industries

    will tend to become a less potent political force for protection over time as long as protection

    does not induce new investment. As exiting physical and human capital depreciates, the quasi-

    rents on sunk investments that are lost due to foreign competition will diminish and the political

    demand for protection will decline. Protection that is temporary, and that phases out over time, is

    thus a politically savvy response to the problem of declining industries. It addresses the political

    exigencies in the short term, but allows the joint political benefits of reciprocal trade agreements

    to be realized in the long term.

    In sum, the contractarian perspective suggests that Article XIX was simply a device for dealing

    with the political uncertainty associated with the original GATT agreement, defining

    circumstances in which the temporary suspension of concessions was jointly optimal in a

    political sense for the officials that entered the GATT. I believe that this perspective allows us to

    explain all the important features of Article XIX(1)the serious injury requirement, the

    requirement of increased imports, the requirement that the increase be unforeseen and

    attributable to a trade concession, and the requirement that safeguard measures be temporary. On

    this account, there is no clear or necessary connection between safeguards actions and the

    promotion of economic welfare or efficiency as conventionally defined, and it should then come

    as no surprise that efficiency explanations for safeguards are unconvincing.

    Nevertheless, as argued in Sykes (1991), it is possible that Article XIX is welfare enhancing, for

    two reasons. First, by allowing officials to reduce the danger that trade concessions will prove a

    net political detriment after the fact, they become more willing to make them the costs of

    protection under Article XIX ex post, therefore, must be balanced against the additional tradeconcessions that it facilitates ex ante. It is not clear, and probably not knowable, whether the net

    welfare impact in this respect is positive or negative. Second, the welfare consequences of

    Article XIX also depend importantly on the extent to which nations negotiate trade compensation

    following safeguards actions, or instead engage in trade retaliation. The former possibility

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    obviously ameliorates or eliminates adverse welfare consequences, while the latter possibility

    exacerbates them.

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    before initiation of the SG, none tariff measures would no longer be expected to differ

    significantly from tariffs in their relative impact on established versus new suppliers.

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